Is Rubicon Organics (CVE:ROMJ) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Rubicon Organics Inc. (CVE:ROMJ) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Rubicon Organics

What Is Rubicon Organics's Net Debt?

As you can see below, at the end of March 2023, Rubicon Organics had CA$10.4m of debt, up from CA$9.71m a year ago. Click the image for more detail. However, it does have CA$8.28m in cash offsetting this, leading to net debt of about CA$2.14m.

A Look At Rubicon Organics' Liabilities

Zooming in on the latest balance sheet data, we can see that Rubicon Organics had liabilities of CA$7.07m due within 12 months and liabilities of CA$9.66m due beyond that. Offsetting these obligations, it had cash of CA$8.28m as well as receivables valued at CA$4.32m due within 12 months. So it has liabilities totalling CA$4.14m more than its cash and near-term receivables, combined.

Of course, Rubicon Organics has a market capitalization of CA$28.1m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Rubicon Organics can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Rubicon Organics wasn't profitable at an EBIT level, but managed to grow its revenue by 66%, to CA$39m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Rubicon Organics still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CA$1.8m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CA$342k of cash over the last year. So suffice it to say we do consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Rubicon Organics that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.